Michael Dell Isn’t Trying to Pull a Fast One

By William D. Cohan -
Mar 3, 2013

Michael Dell roiled Wall Street and
the technology industry by announcing last month that he and the
private-equity firm Silver Lake Partners would be taking his
eponymous home-computer maker private. The deal raised many
questions -- most important, whether Dell, by far the largest
shareholder, and Silver Lake were paying Dell’s fellow
shareholders a fair price for their stock -- yet I’ve read
little in the business press that tackled them satisfactorily.

So I was pleased to open my New York Times last week to see
that Gretchen Morgenson, the Pulitzer Prize-winning financial
columnist, was delving into the Dell Inc. deal. Thanks to her
long tenure, sharp insights and willingness to speak truth to
power, she is arguably the most respected financial writer
around.

Yet this time my pleasure turned to dismay. Morgenson,
writing about the need for an independent, third-party financial
evaluation of Silver Lake’s and the management’s $24.4 billion
proposal for Dell, got it terribly wrong.

This is not because the need for a powerful independent
voice representing non-management shareholders is a boneheaded
idea. Rather, it’s such a good and important idea that the Dell
board had already thought of it, and done it. Morgenson
acknowledged this in passing, but nonetheless said that
“investors would benefit” from a new investigation by something
called the Shareholder Forum, a “nonpartisan” (whatever that
means in this context) organization headed by a former
investment banker, Gary Lutin, that says it supports “investor
access to decision-making information.”

Shareholder Interests

For those who came away from the Morgenson column with the
impression that Michael Dell might be stealing his own company,
I’ll recount what really happened over the last few months. The
facts should give comfort to Dell shareholders otherwise worried
that nobody was looking out for their interests while the deal
went down.

In August 2012, Dell, a 48-year billionaire, told his board
of directors, of which he was the chairman, that he was
considering making a proposal, with a to-be-determined private-
equity firm, to buy the 86 percent of the company he didn’t
already own. Immediately, as is appropriate under the
circumstances, the board formed a four-member “special
committee” to evaluate Dell’s proposal on behalf of the outside
shareholders of the firm. As its chairman, the directors
selected Alex Mandl, a former telecommunications executive whom
I know as an extremely honorable man from my days as an
investment banker. The special committee consisted of three
other people I don’t know, but who from all accounts are also
highly respected: Ken Duberstein, a former chief of staff to
President Ronald Reagan; Laura Conigliaro, a former technology
analyst and partner at Goldman Sachs Group Inc.; and Janet Clark, the chief financial officer at Marathon Oil Corp.

The special committee has met more than 25 times, according
to Dell’s public filings, including participating in six board
meetings with only the independent directors present (meaning
without Michael Dell, the board’s chairman.) Working with
JPMorgan Chase & Co., its financial adviser; Debevoise &
Plimpton LLP, its legal adviser; and an unidentified management
consultant who was hired to conduct a strategic review of the
company, the committee spent five months considering a variety
of alternatives to what Dell was proposing.

It explored all options in search of maximizing shareholder
value: Should the company stay public and continue to execute
its business plan? Should it modify its business plan? Should
the company do a “leveraged re-cap” -- take on some debt and pay
out a dividend to shareholders -- while the stock remained
publicly traded? Should the company sell assets, such as its
financial-services arm or its personal-computer business? Should
Dell sell itself to another company or consider a merger?

Raised Bid

In late October, the special committee started negotiating
with Silver Lake as well as another (unidentified) private-
equity firm that was also considering buying Dell. While the
specifics of the bidding have not yet been released publicly --
that will likely be explained more fully in the proxy statement
to be filed in May before the shareholder vote -- the special
committee asked both private-equity firms to increase their
initial bids in order to stay in the process. Silver Lake raised
its bid; the other firm dropped out.

The committee then invited a third private-equity firm to
perform due diligence and to make a bid for the company. But
after a few weeks spent studying Dell Inc. (DELL) from the inside, it
also dropped out. Then the special committee sat down to
negotiate a final price and a contract with Silver Lake. At one
point, the committee got Silver Lake to increase its final price
to $13.65 per share after Michael Dell agreed to value his own
shares at $13.36 per share, a 2.2 percent haircut that cost him
a cool $71 million of value. Not material to a billionaire,
perhaps, but a nice gesture all the same.

Michael Dell made another important concession to the
special committee: That a majority of the non-management
shareholders would need to approve the deal for it to happen,
essentially silencing his own millions of votes.

But wait, there’s more. The special committee then hired
Evercore Partners Inc. (EVR), the investment-banking firm, to find a
higher bid for Dell, if possible. Evercore has 45 days (and
perhaps even longer under some circumstances) to find a better
offer; its compensation is heavily skewed toward doing just
that. The special committee also negotiated a minuscule breakup
fee of $180 million that would go to Silver Lake if the deal
fell through, far less than the 3 percent of equity value that
has become a norm. This means anyone wanting to top the Silver
Lake deal would only have to pay an additional dime, or so, per
share to do so, chicken feed in this context.

Although the $13.65 per share offer for Dell was a 37
percent premium to the average closing price of Dell stock
during the previous three months, and JPMorgan deemed the price
“fair” from a financial point of view, it is not a surprise that
some shareholders -- such as Southeastern Asset Management Inc.,
the second-largest shareholder -- want a higher price. Of
course, they do. When it comes to a buyout offer, more is always
better.

To suggest that the special committee didn’t do its job is
an insult to its members and to its advisers, who certainly
appear to be working very hard to get the best deal for all
shareholders. If you have Dell stock and you don’t like Silver
Lake’s deal, the solution isn’t to get another valuation. The
solution is to vote down the deal and live with the
consequences.

(William D. Cohan, the author of “Money and Power: How
Goldman Sachs Came to Rule the World,” is a Bloomberg View
columnist. He was formerly an investment banker at Lazard
Freres, Merrill Lynch and JPMorgan Chase. The opinions expressed
are his own.)

To contact the writer of this article:
William D. Cohan at wdcohan@yahoo.com